Jed Graham

FW: Oct. 1, 2016

No matter who wins the White House in 2016, there's no getting around it: Social Security benefits will be cut starting in 2017. A 1983 pact between President Reagan and the Democrat-led Congress to stave off an imminent Social Security financing crisis included a hike in the official retirement age from 65 to 67 somewhere in the far-off future.

But that pact is pushing the limits of age-related reforms , even as a new funding crisis builds for the retirement program.

The retirement age rose to 66 in two-month increments between 2000 and 2005. Between 2017 and 2022, the retirement age will rise to 67.

In practical terms, workers claiming benefits at age 62 in 2022 and beyond will face a 30% reduction in the annual benefit that they receive throughout their lives. When the retirement age was 65, those claiming benefits at 62 suffered a 20% cut.

The cuts are intended to be an actuarially fair trade-off allowing people to get a benefit that's smaller but runs for more years.

While it may be fair, that doesn't mean it won't hurt. If that 30% cut were in place today, it would shrink the available benefit for a $30,000-earner turning 62 down to the poverty level, a bit less than $12,000 a year. That's hardly enough to ensure income security for members of the working class who live long enough to deplete their savings.

In Trust Fund We Bust

Yet despite the coming rise in the retirement age, Social Security's cash deficit is set to explode to $361 billion in 2025 from $74 billion in 2014, the Congressional Budget Office estimates. The CBO's estimates point to the $2.8 trillion trust fund being depleted late in 2029, after which program revenues will cover only about 75% of scheduled benefits.

Something has to be done to put the program on a firmer footing, and potential Republican candidates have begun stepping forward with their ideas. Chris Christie and Jeb Bush have both put themselves squarely behind a further increase in the retirement age. Christie specifically advocated a hike to age 69, closing a bit more than one-third of the financing shortfall.

But a hike to age 69 would mean that early retirees would have a whopping 39% benefit cut for life. To avoid that scenario, Christie proposed raising the earliest eligibility age for claiming benefits to 64, in tandem with the retirement-age increase.

Delay Retirement

There's some logic in that approach, says the American Enterprise Institute's Andrew Biggs, deputy Social Security commissioner under President Bush.

Instead of further eroding the benefit that seniors will rely on late in life, workers would face the penalty in their early 60s. Ideally, they would keep working longer so that they'd be able to spread their savings over fewer years of retirement.

His message to Republicans is not to focus on solvency alone but also on "how do you make the system more effective?"

Looking for ways to encourage later retirement may be more important than ever, now that ObamaCare's subsidies, which grow much more generous as income falls, are pushing in the opposite direction.

Christie also proposes raising the Medicare eligibility age — currently 65 — by one month a year, to 67 by 2040, saying, "It encourages seniors to remain in the workforce."

Christie emphasized in a New Hampshire speech that he would gradually phase out Social Security benefits for seniors with income above $80,000, with no benefits going to those earning more than $200,000.

"Do we really believe that the wealthiest Americans need to take from younger, hard-working Americans to receive what, for most of them, is a modest monthly Social Security check?" Christie asked.

Still, his means-testing proposal wouldn't save much money be cause it won't affect many people.

Undoubtedly, a rise in the earliest retirement age would most affect those who have difficulty extending their careers and little savings to fall back on.

Social Security Administration data show that about 30% of beneficiaries in their early 60s rely on the program for at least 80% of total income.

There are two ways of insulating lower earners from benefit cuts. President Bush and Rep. Paul Ryan, R-Wisc., previously proposed to bolster Social Security's minimum benefit in ways that might provide a net increase to help keep the lowest earners out of poverty.

A second possibly complementary option would be to ask workers to set aside a fraction of additional income in a personal account that could eventually be tapped to offset benefit cuts early in retirement.

If this extra saving were mandatory, it might be criticized as a tax hike. Yet if it were done on a voluntary basis, letting workers opt out of a new savings initiative, there would be much less of a sure thing that financially stretched workers would participate in.